The Big Lie In Banking

-Mark Twain

“The great masses of the people … will more easily fall victim to a big lie than to a small one.” — Adolf Hitler, Mein Kampf.

The Success of the Big Lie Tactic

A Big Lie is a lie so colossal that no one would believe that someone could have the brazenness to distort the truth so blatantly. A reliable propaganda technique, it is usually, probably wrongly, attributed to Hitler’s propagandist Goebbels. He used it successfully, but likely did not invent it.

To update Mark Twain: It’s easy to convince people that it happens in Russia, but it’s hard to convince people that it can happen in the USA.

* By 2011, Steve Denning, of the conservative Forbes magazine, wrote an article entitled, Lest We Forget Why We Had A Financial Crisis, reviewing the commonly accepted explanations of the 2008 meltdown and exposed their falsity as a Big Lie.

* At the same time, Barry Ritholtz of the Washington Post came to the same conclusion and focussed it in his headline, What Caused The Financial Crisis? The Big Lie Goes Viral.

The Big Lie regarding 2008 had several alternatives, all of them absolving the bank of any criminal activity and placing blame on:

* the government,

* Fannie Mae, or

* foolish, kind-hearted bankers for lending to the undeserving poor.

As one example, Denning quotes billionaire Michael Bloomberg who promoted the idea that it was the fault of the government who “forced” banks to lend to low-income people. Here’s what Bloomberg said:

“It was not the banks that created the mortgage crisis. It was, plain and simple, Congress who forced everybody to go and give mortgages to people who were on the cusp.”

And that’s from a Democrat!

However, as Denning points out in his article: in 2006, 84% of the subprime loans were issued by private lenders. These mortgage lenders were not subject to any government regulation let alone a regulation forcing them to lend to those with low credit. And add to that: “there were absolutely no government regulations forcing regulated banks to lend to lower income groups as Bloomberg alleges”.

The closest legislation might be the Community Reinvestment Act (CRA) that required regulated banks to lend to blacks who had the same credit score as whites to counter red lining.

Better Markets quoted studies confirming Denning’s comments that, in that most of the toxic subprime lending was by private lenders and they were not subject to the CRA.

Denning saw clearly what was happening and the purpose. He wrote, “And now front men like Bloomberg are busily rewriting history to enable the bonuses to continue”.

Denning also discredited the belief that Fannie Mae was a cause of the crisis: “Even this morning, November 22, 2011, a seemingly smart guy like Joe Kernan was saying on CNBC’s Squawkbox, “When the losses at Fannie and Freddie reach $200 billion… how can the ‘deniers’ say that Fannie and Freddie were enablers for a lot of the housing crisis. When it gets up to those levels, how can they say that they were only into sub-prime late, and they were only in it a little bit?”

Denning responded the reason that people can say that is because it is true. The $200 billion was a mere drop in the ocean of derivatives which in 2007 amounted to three times the size of the entire global economy.

In another form of the Big Lie, bankers claimed that they foolishly believed the housing market would always go up and so they recklessly lent to people with poor credit.

James M Breslow of Frontline, quoted Jamie Dimon, CEO of JP Morgan, testifying before the Financial Crisis Inquiry Commission, “In mortgage underwriting,” Dimon said, “somehow we just missed, you know, that home prices don’t go up forever.”

To quote Denning again: “When the country’s leaders start promulgating obvious nonsense as the truth, and the Big Lie starts to go viral, then we know that we are laying the groundwork for yet another, even-bigger financial crisis”.

We will penetrate the Big Lie:

* To reveal how the banks committed outrageous crimes.

* Have gotten away with that with the help of the Department of Justice.

* How are they now gaming the system keeping it fragile for the sake of their outrageously high bonuses.

* To understand the importance of reigning in banker pay.

This high banker pay, according to Thomas Piketty in his is a leading cause of economic inequality.

The financial crisis of 2008 was actually two separate crises, though one depended on the other. We will look at both separately:

* the mortgage market crisis that artificially inflated and deflated housing prices* banks speculating with depositor money in the derivative markets.

These crises required three substantial bailouts but only one received any coverage.

We begin next with the role that commercial banks and private mortgage companies played in the mortgage market.

Originally published at https://jandweir.substack.com.